Theory Of Firms

Question 1

Monopoly market share

Answer 1

25%

Question 2

Concentration ratio

Answer 2

The percentage of market share taken up by the largest firms
Eg 3 firm concentration ratio is 75%

Question 3

Normal profit

Answer 3

The minimum profit required to keep factors of production in their current use in the long run

Question 4

Abnormal/super normal

Answer 4

Profit achieved in excess of normal profit

Question 5

Subnormal profit

Answer 5

This is profit which is less than normal
P<average cost

Question 6

Perfect competition assumptions

Answer 6

Large number of firms
Product homogenous
Low barriers to enter/exit
Price takers
Perfect knowledge for both

Question 7

Short run loss minimisation (perfect comp)

Answer 7

If price below costs shift S because firms will leave market
If losing money in the short run businesses will continue as long as they can cover variable costs
Long term returns to normal profit

Question 8

Long run (perfect comp) if making a loss

Answer 8

If making loss in long run firms will leave market. No barriers to exit
This means reduction in supply so price rises
Always return to normal profit

Question 9

Long run super normal profit (perfect comp)

Answer 9

Return to long term equilibrium as firms enter supply shifts right and price reduced

Question 10

Monopoly

Answer 10

One firm
Products vary
Barriers to enter and exit
Price maker
Imperfect knowledge

Question 11

Monopolistic competition (elastic)

Answer 11

Large number of firms
Some element of control over price due to differentiated produce
Products close but not perfect are substitutes
Low barriers to entry and exit
Imperfect knoweledge
Price maker

Question 12

Advantages of monopoly

Answer 12

Economies of scale
R&D reinvest

Question 13

Price discrimination

Answer 13

The practice of charging different price for some goods/services

Question 14

First degree price discrimination

Answer 14

Different price for every unit consumed

Question 15

Second degree

Answer 15

Different price for different quantities

Question 16

Third degree price discrimination

Answer 16

Different price to different consumer

Question 17

Conditions for price discrimination

Answer 17

Different markets
Each segment has different elasticities
Markets kept separate (no seepage)

Question 18

Natural monopoly

Answer 18

When the most efficient number of firms in the industry is one

Question 19

Oligopoly

Answer 19

Competition between the few
May be a large number of firms in the industry but is dominated by a small number of large producers

Question 20

Features of an oligopolistic market structure

Answer 20

Price stable across the industry (kinked demand)
Potential for collusion
Goods homogenous or highly differentiated
Brand loyalty
Non price competition
Game theory
High barriers to entry

Question 21

Contestable market

Answer 21

Where an entrant has access to all production techniques available to incumbents (already in market) and entry decisions can be reversed without costs

Question 22

Contestable market features

Answer 22

Firms behaviour affected by threat of new entrants
No barriers to entry or exit
No sunk costs
Firms may make artificial barriers to entry or limit profits to stop new entrants

Question 23

When do markets become conestable

Answer 23

Over capacity
Aggressive marketing
Find ways of reducing costs and increasing efficiency
Potential for predatory or destroyer pricing

Question 24

Hit and run (contestable market tactic)

Answer 24

Enter industry take profit and leave
(No barriers to entry or exit)

Question 25

Cream skimming (contestable market tactic)

Answer 25

Identifying parts of the market that are high in value added and exploiting those markets

Question 26

Monopsony

Answer 26

When a single buyer controls the market for a particular good or service

Question 27

Monopsony power

Answer 27

Buying or bargaining power
Monopsony can exploit their bargaining power

Question 28

Evaluating the economic welfare effects of monopsony power in markets

Answer 28

Improved value for money
Producer surplus

Question 29

Evaluating monopolistic competition

Answer 29

Not allocatively efficient- price doesn’t equal marginal cost
Not Productively efficient- many firms not allowing for economies of scale
Dynamic- competition brings motivation for product innovation